Hill to credit rating agencies: Get lost

Another of Wall Street’s top credit rating agencies is scolding lawmakers over their fiscal cliff deadlock, warning that a failure to strike a deficit deal could cost the government its top-tier status as a trustworthy borrower.

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Fiscal cliff: A primer

For one, it’s a tune Capitol Hill has heard before. Standard & Poor’s set off alarm bells in 2011 when it downgraded U.S. credit following the debt ceiling debacle, but so far lenders have largely shrugged off the agency’s warning.

“Anyone who thinks America is not going to pay its debts is nuts. America is going to pay its debt,” said Massachusetts Rep. Barney Frank, the top Democrat on the House Financial Services Committee. “This shows the absolutely wrong-headedness of the rating agencies, because after they downgraded us our costs went down.”

And rating agencies have faced a rough reception on the Hill since they played a key role in the 2008 financial crisis.

“You’ve got to remember that these are the same credit rating agencies that declared the mortgage-backed securities as good paper,” said Idaho Republican Sen. Jim Risch, referencing the agencies’ favorable view of the type of bonds whose widespread collapse was at the center of the crisis.

The comments come after Fitch Ratings Wednesday warned lawmakers that if they take the economy for a trip over the fiscal cliff — or even drive it too close to the edge — they could hurt the country’s credit rating.

“If the negotiations on the fiscal cliff and raising the debt ceiling extend into 2013 and appear likely to be prolonged with adverse implications for the economy and financial stability, the U.S. sovereign rating could be subject to review, potentially leading to a negative rating action,” Fitch said in a report Wednesday.

Following Standard & Poor’s 2011 downgrade — the country’s first-ever loss of its AAA credit rating — some partisans claimed the downgrade signaled a need to quickly reduce deficits and was the harbinger of a debt crisis.

But a year-and-a-half after the downgrade, just the opposite has happened.

Instead, the government’s borrowing costs have fallen sharply. The week before S&P’s downgrade, interest rates on 10-year constant maturity Treasury bonds were hovering around 3 percent. As of this Tuesday, that rate had fallen nearly by half, coming in at 1.84 percent.

“The idea that we lurch from crisis to crisis, and every six months, or every nine months, that we threaten not to pay our bills on stuff we've already bought, and default, and ruin the full faith and credit of the United States of America — that's not how you run a great country,” Obama said Wednesday. “So I've put forward a very clear principle: I will not negotiate around the debt ceiling.”

While they share a disdain for the ratings agencies, Republicans and Democrats differ sharply in what the low rates mean for the nation’s financial security.

Frank said the rates show that the debt crisis is overstated and that the government should focus on stimulus spending in the short run while working to close the deficit in the long run.

The low rates have “persuaded the great majority of rational people that inflation is not now a problem and is not likely to be in the near future,” Frank said. “You have the ideologues, and this has effectively cut the ground out from under them.”

But Risch said that the ratings agencies are being far too generous in their credit assessments and that the nation’s dire fiscal straits demand a lower rating.

“A first-year accountant would look at the United States financial condition and wouldn’t give us a grade anywhere near that,” he said. “We borrow 40 cents out of every dollar and have no plans to change that. We’re accruing debt at over a trillion dollars a year and up to $16 trillion.”

Iowa Republican Sen. Chuck Grassley (R-Iowa) said inflation — not credit rating agency assessments — could drive up borrowing costs and that that risk is increasing because the fiscal cliff debate has prioritized taxation over spending.

“There hasn’t been enough, in all this discussion, talking about the expenditure side,” he said. “We’ve had a lot of talk about the tax side, and that takes care of about 10 percent of the deficit. But what about the other 90 percent?”

Fitch declined to comment for this story.

S&P officials defended their credit ratings, saying that investors could agree the U.S. had become a slightly less reliable borrower while still accepting lower interest rates.

“I think investors agree with us that the credit risks are higher than they were, but that’s only one factor in their decision,” said John Chambers, chairman of S&P’s sovereign rating committee.

Investors shop around when looking to lend, and amid the European debt crisis, even low-interest rate U.S. bonds still seem like a good deal by comparison, Chambers said.

S&P continues to have a “negative outlook” on the U.S. credit rating, meaning the firm believes the United States credit rating is right now more likely to slip further than it is to recover its perfect status.

But Chambers said that could change with the right fiscal cliff deal.

“If we get an agreement that we think would stabilize public finances in the United States, that might help to stabilize the ratings at the current level,” he said. “I’m actually more optimistic on the negotiations than I was awhile ago.”

This article first appeared on POLITICO Pro at 5:34 p.m. on December 20, 2012.